By Lee Halpin
Eating healthier, probably, doing more exercise, perhaps, but I doubt that making sure your retirement plans are in good shape made many, if any, New Year resolutions.
But as we begin a new year, it offers as good an opportunity as any for individuals to kick the tyres of their personal pension provision.
Pensions can be complex and understandably many people can find it an overwhelming task to attempt to manage the many associated, and often conflicting, risks involved.
But, as with most things in life, there are fundamental points worth getting to grips with so that individuals can consider how they apply specifically to them. So, to this end, here are three essential things worth quickly checking pension policies for to assess if they in decent shape for the future.
The first is considering if the worst happens and what would happen on death?
Generally, pension death benefits do not form part of a person’s estate, and thereby avoid inheritance tax, provided they are paid at the discretion of the pension scheme trustees or pension provider.
So, whilst a binding nomination typically cannot be made, an expression of wishes can, and should be, completed to steer the pension scheme trustees on who the individual would like to receive pension benefits on their death.
Not including someone on an expression of wishes can also limit the type of pension death benefits available to the beneficiaries.
For example, an adult child would not normally be deemed a dependant and so might only be entitled to a lump sum benefit unless there are named on an expression of wishes. So, the ability to pass wealth down the generations within the pensions tax wrapper, in order to retain the generous tax exemptions, can be unintentionally lost.
Therefore, it is worth making sure that you have completed an expression of wishes and that it reflects your current wishes, as circumstances can, and often do, change over time. This should be a routine check for each pension policy that you have.
Next on the list is a matter currently on the regulator’s radar. The regulator has expressed concern that “some consumers hold a significant proportion of their non-workplace pension assets in cash for sustained periods of time”.
The crux of the issue here is that the cumulative impact of being invested in growth investments rather than cash or cash-like assets can be very significant over the long term. According to the regulator’s own calculations,
a person making regular pension savings over
a 20-year period and investing in growth investments could have a pension pot at least
55 per cent larger.
Ultimately, being invested in assets aimed at providing growth is crucial in helping to achieve a pension pot that can provide an adequate and sustainable level of income when it is likely to be required in the future.
It is therefore worth checking to ensure your pension is not inadvertently overweight in
cash or cash-like holdings. Indeed, it is
generally worth making sure that you have
a well-diversified investment portfolio that
suits your risk appetite and that the cost of this
is not excessive.
Whilst individuals who are members of
a pension scheme will receive a statement
each year, it can be a difficult task trying
to put the various pieces of information
into some context or priority. These
statements are not known for their simplicity.
As most people will be reliant on their pension income to replace employment income at some point later in life, the final point would be to focus on the estimated pension income projected to be available at the planned retirement date. For personal pensions, this can be found in what is known as the statutory money purchase illustration.
This is not an exact science because it involves making assumptions for many future unknowns, such as investment returns and inflation. But it can provide a crude indicator of what level of income the pension is on course to provide
and from there, it can be compared with the actual level of income expected to be needed
in retirement.
The good news is that for those needing some further support or wishing to delve deeper there is help at hand. MoneyHelper is backed by the government and offers impartial guidance aimed at making pension choices clearer. For those aged 50 or over, there is also the option of booking an appointment with Pension Wise – a service from MoneyHelper that offers free, impartial pensions guidance about your defined contribution pension options.
Generic guidance is, of course, no substitute for seeking regulated financial advice. Whilst such a service comes at a cost, this must be weighed up against the value that a tailored recommendation can offer.
Like your health, your pension will usually benefit from you being proactive and acting sooner rather than later. So perhaps when attempting to turn over a new leaf this year, your pension could well be worth a thought.
Lee Halpin is head of technical services @sipp.
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